-'\'h~INAL ......:j I """ RECEiVED VERNER' LIIPFERf BERNHARD' McPHERSON ~ HAND JUl 25 2000 ICHARTEREDI .-w.~l~;il~ 901- 15m STREET, N.W. tI'IQllf "lliE seal.'TM't WASHINGTON, D.C. 20005-2301 (202) 371-6000 FAX: (202) 371-6279 EX PARTE OR LATE FILED WRITER'S DIRECT DIAL (202) 371-6206 July 25, 2000 VIA HAND DELIVERY Ms. Magalie Roman Salas Secretary Federal Communications Commission 445 12th Street, SW Washington, D.C. 20554 Re: Ex Parte ofThe Walt Disney Company in CS Docket No. ..., 00-30», Dear Ms. Salas: Enclosed for filing please find the original and one (1) copy ofthe ex parte filed on behalf ofThe Walt Disney Company in the above-referenced docket. Please stamp and return to this office with the courier the enclosed extra copy ofthis filing designated for that purpose. Please direct any questions that you may have to the undersigned. Enclosures cc: Chairman William, E. Kennard Commissioner Harold Furchtgott-Roth Commissioner Susan Ness Commissioner Michael Powell ~o. oi Copies rec'd Of1 Commissioner Gloria Tristani List ABe 0 E • WASHINGTON. DC • HOUSTON • AUSTIN • HONOLULU • LAS VEGAS • McLEAN • MIAMI Deborah Lathan Bill Johson James Bird Royce Dickens Linda Senecal Darryl Cooper George Vradenberg, III Jill A. Lesser Steven N. Teplitz Richard E. Wiley Timothy Boggs Catherine R. Nolan Aaron I. Fleischman Arthur H. Harding Craig A. Gilley •..;;,'~C'E'\f lCr,-o '" '. 2::; 2000 Before the Federal Communications Commission !'~'-.I'~ oorAllll. Washington, D.C. 20554 &rl"P.,;: iJii ,HE SECAETMr In the Matter of ) ) Applications ofAmerica Online, Inc. ) CS Docket No. 00-30 and Time Warner, Inc. for ) Transfers ofControl ) ) WRITTEN EX PARTE FILING OF THE WALT DISNEY COMPANY THE COMMISSION SHOULD NOT APPROVE THE AOLrrIME WARNER COMBINATION WITHOUT IMPOSING STRONG AND ENFORCEABLE CONDITIONS TO SAFEGUARD AGAINST ANTICOMPETITIVE AND ANTI­ CONSUMER CONDUCT BY THE MERGED ENTITY Preston Padden Lawrence R. Sidman, Esquire Executive Vice President, Lawrence Duncan, III, Esquire Government Relations Jessica A. Wallace, Esquire The Walt Disney Company VERNER, LUPFERT, BERNHARD, 1150 17th Street, NW MCPHERSON & HAND, CHARTERED Suite 400 901 15th Street, N.W. Washington, DC 20036 Suite 700 Washington, D.C. 20005 Lou Meisinger Executive Vice President & (202)371-6206 General Counsel The Walt Disney Company Counsel for The Walt Disney Company 5000 South Buena Vista Street Burbank, California 91521 James W. Olson, Esquire Marc G. Schildkraut, Esquire Alan N. Braverman Scott Weisman, Esquire Executive Vice President & HOWREY, SIMON, ARNOLD & WHITE, LLP General Counsel 1299 Pennsylvania Avenue, NW ABC, Inc. Washington, DC 20004 77 West 66th Street New York, New York 10023 (202)383-7246 OfCounsel for The Walt Disney Company July 25, 2000 TABLE OF CONTENTS I. INTRODUCTION AND OVERVIEW 1 II. THE INTERNET TODAY 7 A. THE INTERNET HAS RAPIDLY BECOME A MAJOR ECONOMIC AND CULTURAL FORCE ................................................................................................................................. 7 B. THE ESSENCE OF THE INTERNET HAS BEEN ITS OPENNESS 8 III. AOL ALREADY IS THE DOMINANT COMPANY ON THE INTERNET..........•.. 9 A. AOL TODAy 9 B. AOL's POSITION Is STRENGTHENING 11 C. AOL HAS SUBSTANTIAL POWER IN SEVERAL INTERNET MARKETS •..................... 13 D. AOL OBTAINED AND HAs MAINTAINED ITS DOMINANT POSITION THROUGH EXCLUSIONARY CONDUCT 17 IV. TIME WARNER POSSESSES ENORMOUS MARKET POWER 20 A. TIME WARNER HAs SUBSTANTIAL MARKET POWER AT BOTH THE DISTRIBUTION AND PROGRAMMING LEVELS OF THE CABLE INDUSTRy 20 B. TIME WARNER'S LOCAL CABLE MONOPOLIES GIVE IT ENDURING MARKET POWER ............................................................................................................................... 21 C. TIME WARNER Is THE WORLD'S LARGEST TRADITIONAL MEDIA COMPANY 22 D. THE BREADTH OF TIME WARNER'S HOLDINGS PLACES IT IN A UNIQUE POSITION To DOMINATE THE INTERACTIVE SERVICES MARKET 24 E. TIME WARNER'S EXCLUSIONARY CONDUCT 24 F. TIME WARNER'S EXERCISE OF MONOPSONY POWER 30 G. AOL AND TIME WARNER'S PATTERN OF ABUSE THREATENS THE INTERACTIVE TELEVISION MARKET 31 V. INTERACTIVE TELEVISION IS RAPIDLY EMERGING AS THE FUTURE OF TELEVISION 31 VI. THERE WILL BE NO CLOSE SUBSTITUTES FOR CABLE IN THE PROVISION OF INTERACTIVE TELEVISION FOR THE FORESEEABLE FUTURE 34 ----- ------------------ -,-",------ ---- ------------------------ VII. PAST IS PROLOGUE: AOLffIME WARNER WILL HAVE THE ABILITY AND INCENTIVE TO USE EXCLUSIONARY POWER IN THE INTERACTIVE TELEVISION MARKET.............................................................................•..............•.• 37 A. MEDIA INCUMBENTS HAVE LONG USED THEIR POWER TO EXCLUDE RIVALS IN EMERGING MARKETS 37 B. PRE-MERGER INCENTIVES FOR AN OPEN INTERACTIVE TELEVISION SYSTEM OUTWEIGH THE INCENTIVES FOR A CLOSED SySTEM 40 C. POST-MERGER AOLffIME WARNER WOULD HAVE THE INCENTIVE AND THE ABILITY TO CLOSE THE INTERACTIVE TELEVISION SYSTEM 43 D. THE AOL-TIME WARNER CLOSED SYSTEM WILL SPREAD BEYOND TIME WARNER'S CABLE SySTEMS 45 E. CONSUMERS WOULD BE HARMED BY THE CLOSED INTERACTIVE TELEVISION SySTEM 46 F. AOL-TV: THE SHAPE OF ANTICOMPETITIVE AND ANTI-CONSUMER BEHAVIOR FROM AOLffiME WARNER To COME 48 VIII. THE COMMISSION CANNOT APPROVE THE AOL/fIME WARNER ACQUISITION UNLESS IT DETERMINES THAT IT IS IN THE PUBLIC INTEREST AND PROCOMPETITlVE.......•........•.•............••.............••.............•.•...... SO IX. CONDITIONS THE COMMISSION SHOULD IMPOSE AS A PREREQUISITE TO ANY APPROVAL OF THE AOL/fIME WARNER ACQUISITION 53 A. THE COMMISSION SHOULD REQUIRE AOLffIME WARNER TO SEPARATE ITS OWNERSHIP OF CONTENT FROM ITS OWNERSHIP OF ITS BROADBAND CABLE DISTRIBUTION FACILITIES 53 B. IN THE EVENT THE COMMISSION DOES NOT REQUIRE SEPARATE OWNERSHIP OF THE BOTTLENECK CONDUIT AND THE CONTENT FLOWING OVER IT, THE COMMISSION SHOULD IMPOSE CLEAR AND ENFORCEABLE CONDITIONS ON ANY APPROVAL OF THE AOLffIME WARNER ACQUISITION PROHIBITING DISCRIMINATION AGAINST UNAFFILIATED CONTENT AND INTERACTIVE TELEVISION SERVICE PROVIDERS 60 C. SOURCES AND PRECEDENTS FOR ANTI-DISCRIMINATION CONDITIONS 63 D. ANTI-DISCRIMINATION CONDITIONS NEEDED To MITIGATE THE ANTICOMPETITIVE EFFECTS OF THE AOLffIME WARNER ACQUISITION 66 E. THE COMMISSION SHOULD REQUIRE INTEROPERABILITY AMONG AOLffIME WARNER INSTANT MESSENGERS AND RIVAL INSTANT MESSENGERS 80 X. ARBITRATION PROCEDURES SHOULD BE USED TO ENFORCE THE SAFEGUARDS NECESSARY TO PREVENT AOLffIME WARNER FROM ENGAGING IN ANTICOMPETITIVE, DISCRIMINATORY BEHAVIOR IN THE INTERACTIVE TELEVISION SERVICES MARKET 81 XI. SUMMARY OF PROPOSED TEXT OF CONDITIONS THAT SHOULD BE IMPOSED ON THE AOU TIME WARNER MERGER. 82 A. CONDITION MANDATING SEPARATE OWNERSHIP OF BOITLENECK BROADBAND CABLE CONDUIT AND ITS CONTENT TO ENSURE COMPETITION AND CONSUMER CHOICE IN THE INTERACTIVE TELEVISION SERVICES MARKET 82 B. STRUCTURAL SAFEGUARDS ABSENT COMPLETE SEPARATION OF CONTENT AND CONDUIT 82 C. IN THE ALTERNATIVE, CONDITIONS TO ENSURE NON-DISCRIMINATION, COMPETITION, AND CONSUMER CHOICE IN THE INTERACTIVE TELEVISION SERVICES MARKET 83 XII. CONCLUSION 85 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Applications ofAmerica Online, Inc. ) CS Docket No. 00-30 and Time Warner, Inc. for ) Transfers ofControl ) ) WRITTEN EX PARTE FILING OF THE WALT DISNEY COMPANY I. INTRODUCTION AND OVERVIEW 1 The $183 billion acquisition by America Online, Inc. ("AOL") ofTime Warner, Inc., the largest merger in corporate history, threatens the ability ofU.S. consumers to access freely a new and revolutionary product, Interactive Television. The merger will allow AOL to leverage its dominant position in online Internet services with Time Warner's local cable monopolies to control the emergent Interactive Television market. AOL already is, without question, the dominant provider of online Internet services to residential subscribers. AOL, as its President points out, is "uniquely positioned in the Internet industry" with "an unparalleled connection to consumers.,,2 The fact that AOL's 23 million subscribers spend 85 percent of their time within its "walled garden," rather than the Internet at large, speaks volumes about the extent of AOL's market power and the ability to exclude competition. Time Warner, of course, not only has extensive publishing, television, film, and We/come to the 2r' Century, BUSINESSWEEK, Jan. 24, 2000, at 37. 2 See AOL Third Quarter Earnings Report, <http://corp.aol.com/investors.shtml?> ("AOL Earnings Report"). ----------.. _-~_ .. ------ 3 music holdings making it "the world's leading media company," but also controls bottleneck cable pipelines in communities encompassing 20 percent of the U.S. population. The merged company will be "the driving force behind the next wave ofonline consumer usage growth and the continued convergence ofthe Internet and television.,,4 The Walt Disney Co. ("Disney") is a diversified worldwide entertainment company engaged in the creation and marketing of entertainment content, including live-action and animated motion pictures, broadcast and cable television programming, musical recordings, and a wide variety ofonline content and services. For Disney to succeed in entertaining people ofall ages, consumers must have unhindered access to its creative products. Disney's concern is that the combination ofAOL and Time Warner will significantly augment each company's respective bottleneck monopolies over the distribution of news, information and entertainment content, thereby increasing the combined company's ability and incentive to engage in exclusionary